Watching yesterday's appearance by president Obama on 60 Minutes, one would think that Obama had single-handedly ended the recession and moved this country towards a great economic growth spurt. Of course, Obama's friends at CBS did not really challenge him on that assertion, instead permitting Obama to tell his story of economic heroism. The truth, however, is quite different.
1) What prevented a depression? The answer to this question is simple: TARP and the Federal Reserve. In September of 2008, when Lehman Brothers went under, the banking system around the country and the world seized up. Not only did banks stop lending funds to businesses and individuals, they even stopped lending to each other. There were simply too many questionable assets on the bank balance sheets to permit one bank to evaluate the creditworthiness of other banks. As part of this calamity, short term corporate notes could not be sold, and all manner of financial instruments were left with no one willing to buy them. Had nothing been done, the entire worldwide banking system would have collapsed. Solvent and insolvent instututions would have failed; the panic knew no difference between the two. Corporations dependent on financing would have followed into the abyss. By the time the debacle had ended, some enormous portion of the world economy would have been destroyed, and trillions and trillions of dollars of wealth would have been erased as well. By stepping in with enormous funding, TARP and the Federal Reserve (as well as the European central banks) managed to get the financial system going again. The catastrophic destruction of the world economy due to a failure of the financial markets to function in an atmosphere of panic was avoided.
Here's the key to these events, however: they all took place while George Bush was president. Obama had nothing to do with them.
2) What did Obama accomplish? So what then can we say about Obama's economic performance? Obama's biggest act with regard to the economy was the stimulus. It was a total failure. First let's look at it on Obama's own terms. The stimulus was the most massive effort ever to use Keynesian economics to get the economy moving. In other words, after the near depression that Bush had avoided, the economy was in a serious recession due to lack of demand. This last phrase is important. Recessions can come for all sorts of reasons. This one resulted from enormous fear of a collapse causing people and businesses around the world to stop buying things. Demand was dramatically reduced and business had to downsize so as not to produce more than they could sell. This led to unemployment and more fear and more demand destruction. It takes a while for a cycle like that to end, but it did come to an end by June of 2009.
Obama's stimulus was supposed to increase demand by pumping funds into the economy. This was done with some tax reductions, subsidies to states and localities, so-called shovel ready jobs and a host of government grants and programs. The stimulus, however, was a failure on its very terms. The actual Keynesian viewpoint is that the government has to step in to create demand, and the stimulus did not do this. According to the research, less than 20% of the funds that went to the stimulus type of tax cuts actually were spent to increase demand. The funds that went to the states and localities were just used as subsidies to continue spending as usual; no new demand was created there either. The shovel ready jobs were a joke; there were very few available, so the money just dribbled out slowly with no appreciable increase in demand. Then, of course, there were the funds that just were frittered away by giving them to preferred Democrat interest groups. In short, Obama's stimulus did not actually work as a test of Keynesian economics; it was more a giveaway than an effort to increase aggregate demand in the economy.
3) What did Obama's stimulus actually do? Many economists do not believe that Keynsian economics accurately portrays reality. That is a debate, however, which is beyond the scope of this post. Let's look instead at what the Congressional Budget Office has concluded about the stimulus: according to CBO, the net effect of the stimulus has been to slow economic growth in the USA. The debt run up to pay for the stimulus has more of a drag on the economy than the benefits obtained from that spending.
4) But what of Obama's other economic programs? Didn't they help? Analysis of Obama's economic record is mostly about the stimulus since he spent nearly all the rest of his term on health care. But there were other things that he did. Obama started two different federal programs to help people stay in their houses despite having problems with their mortgages. It is an understatement to say that neither program worked. billions were spent and very very few people got any benefit from either program. Obama extended the Bush tax rates last December until January of 2013. This move was forced on Obama by the Republicans. It probably saved the economy from a double dip recession in 2011. It is hard to give Obama credit for something that he opposed so vehemently and which he continues to oppose.
5) Fearing the Fear. Franklin Roosevelt famously said that Americans had "nothing to fear but fear itself!" Roosevelt knew the corrosive effect on the economy of fear. And yet, Obama has done his best to increase fear throughout the American economy during his tenure. Obamacare has put major uncertainty in the path of any business and any person considering starting a business. The EPA with its possible rulemaking activities that would come crashing down like a hammer on all sorts of businesses and farms further instills fear into potential investors. Rising gasoline prices which, in part, are the result of the Obama energy policy of thwarting production have also led people to fear whether or not they will be able to afford continuing price rises and thereby they have diminished consumer demand. Just at a point when insufficient demand is the key determinant of American prosperity, Obama takes steps to make the problem worse, not to improve it.
This is a list that could go on and on. The conclusion is inexorably clear: Barack Obama has not made the economy better. Obama has made things worse! He gets no credit for preventing a depression only for extending the recession and slowing the recovery!
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